China’s great ‘Zero-COVID’ guessing game

Source: AP

It is the great economic guessing game about China: When will the Chinese government ditch its zero-tolerance approach to COVID-19?

Companies and manufacturers are worrying about their profits, while uncertainty is rippling through financial markets. Global leaders and policymakers are sizing up Beijing’s moves as part of their own growth calculations, given China’s central role in the global economy.

The answer comes down to one man — the country’s top leader, Xi Jinping. His word is all the more sacrosanct since securing a precedent-defying third term at the Communist Party’s congress late last month, where he stacked his leadership with loyalists and set out an agenda that shook global assumptions about the trajectory of the world’s second-largest economy.

The lack of visibility into his thinking has left the world trying to divine whether even the smallest signals could indicate the government is fine-tuning its “zero-COVID” policy to limit the harm to the economy. After the congress, China’s financial markets took a dramatic plunge over concerns about Xi’s power play. Shortly thereafter, speculation about loosening COVID restrictions sent them soaring.

Each day seems to bring new disparate data points for the markets to digest. Low-level health officials urge less drastic enforcement of existing measures, while top officials repeat that they are staying the course.

The authorities are facing a dilemma. Nationwide, daily cases are at a six-month high, with China reporting more than 8,100 new infections per day. Under the usual playbook, officials are resorting to more lengthy lockdowns and costly mass testing to try to stop the spread.

And in China, nothing will be certain until Xi stops trumpeting “zero COVID” or clearly articulates that the country is changing direction.

In a world beset by war in Ukraine, skyrocketing inflation and rising fears of a global recession, China could have been a bright spot for growth. While most countries dealt with widespread infections and mass deaths in the first year of the pandemic, China kept the virus largely in check with snap lockdowns and quarantines, and its economy thrived relative to the rest of the world.

As new COVID variants have proved to be milder and vaccines have become more widespread, the rest of the world has moved on from strict policies. China has stuck to the same heavy-handed approach, concerned that a large number of deaths could come with a policy change, and reluctant to import more potent foreign vaccines.

With each new outbreak and infectious strain of COVID-19, the uncertainty grows over how and when Xi will dismantle his pandemic policy.

“China has this boot on the neck of economic activity, and we’re past the point where the boot made sense,” said Jude Blanchette, an expert on China at the Center for Strategic and International Studies. “The problem is, the most authoritative voice continues to reiterate no change.”

Easing COVID policy matters for the economy. People are staying home, fearful that they might cross paths with someone infected and be sent to a long quarantine under heavy guard. China continues to isolate not just those sick with COVID but anyone who has come in contact with them. Many stores and eateries have closed.

The world’s largest iPhone manufacturing complex in the north-central Chinese city of Zhengzhou went into a lockdown in mid-October and again this month. Some employees fled the 200,000-worker facility with stories of food shortages flooding the internet. Apple this week warned that its sales would be short of expectations because of the drastic measures.

The warning, and China’s latest COVID situation, was described by one analyst as “an absolute gut punch” for the company ahead of the most important holiday season.

The Chinese financial markets, at times, appear disconnected from reality. Investors hoping for a change in policy are pouncing on any information, often rumors or thinly sourced reports, sending the markets on a roller-coaster ride.

Rosy reports from Wall Street banks, pointing to the opportunity for rewards when China opens up, have also helped to fuel rallies. A report from Goldman Sachs this week predicted that Chinese stocks could jump by 20% “on (and before) reopening” from the pandemic.

Often, investors are seizing on official signals, even if the Chinese government isn’t actually revealing much. At a news conference Saturday in Beijing, for example, senior health officials declared that they were “unswervingly” committed to zero-COVID policies, but within reason.

While much of the country remains committed to the zero-COVID strategy, there are signs that the approach is reaching its limit. The financial pressures are mounting on local governments that are running out of money to pay for COVID control measures like mass testing. The social costs, too, are amplifying as more and more people are caught in lengthy lockdowns, their anger, frustration and discontent slipping through internet censors.